Gladstone Investment Corporation - 2nd Quarter Earnings Call - GLADSTONE INVESTMENT CORPORATION

greetings welcome to gladstone investment corporation second quarter 2026 earnings call all lines will be in will be muted during the presentation and then question and answer session will follow the formal presentation if anyone should require operator assistance during the conference please press star zero on your telephone keypad please note this conference is being recorded i will now turn the conference over to dave dolan ceo thank you sir you may begin Thank you, Moderator, and good morning, all. This is Dave Dullam. I'm the CEO of Gladstone Investment Corporation, and this is an earnings conference call for the second quarter ended September 30, 2026, for all our shareholders and the analysts of Gladestone Investment, which is listed on NASDAQ under the trading symbols of GAIN, G-A-I-N for the common stock, GAIN-Z, GAI-I, and GAING for our three different registered notes. So we appreciate you calling in, and at this point, I'm going to turn the call over to Catherine Gerkes, our Director of Investor Relations and ESG, so she can go ahead and give you some information regarding disclosure and regulatory matters. Catherine? Thank you, Dave, and good morning, everyone. Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, GladstoneInvestment.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations Department. We are also on X at Gladstone Coms, as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies. Now I'll turn the call back over to Dave Dellum, CEO. Thanks, Catherine. So good morning again, everyone. And again, we had an extremely productive quarter with new deal origination, new portfolio company acquisitions, as well as a creative add-on activity to some of our existing portfolio companies. For the quarter which ended September 30, we deployed approximately $156 million of capital with $20 million of repayments so that our net investment growth for the quarter was $136 million, increasing our investment portfolio to approximately $1.4 billion at its fair value. Now, subsequent to the quarter end, our acquisition activity continued and we also had a very exciting exit, a company called SFEG, which is one of our long-held portfolio companies and we were able to exit at a value in excess of $400 million, which our largest to date. This should generate and will generate a very significant capital gain for gain and therefore our benefit to our shareholders. And you'll hear more of this later on from our CFO, Taylor Ritchie. This transaction really highlights what I think is very important, which is a key strength of GAINS investing approach, where we can patiently build value through add-on investments and be proactive in the operational action that may be necessary to help our portfolio companies grow and prosper. And all of this activity, indeed, is consistent with our buyout strategy and a business plan for gain, which we've been following for a number of years, where we continue acquiring new portfolio companies through a combination of the equity and debt investments, which do allow us to pay our monthly distributions to shareholders while we continue building the equity value for an exit and therefore create the capital gains or further distributions to shareholders. This strategy has allowed GAIN to consistently achieve some of the highest overall returns to our shareholders amongst our public peer group. So along with this growth in assets, we've also, as we continue building out the business, we've been expanding our team of professionals so that we are able to continue building on this success, continue growing the firm, and continue in our strategic growth plan. And so in this regard, I'd like to now turn it over to Erica Hyland, who is our president, and she took over on October 1st, and have her take over from here. erica okay thank you dave from a deal activity perspective the second quarter was one of our most active on record we acquired one new portfolio we acquired our new portfolio company dhe computer systems to start the quarter and ended the quarter with the acquisition of extrude hone further supporting our investment in global grab technologies we completed two add-on acquisitions for $20.9 million through a combination of first lien debt and preferred equity. We also deployed $18.6 million to Detroit Defense to support an acquisition to further expand their product offering. Subsequent to the quarter end, we continued the robust deal activity as we completed the acquisition of a new portfolio company, McFarland Toys, for $56.1 million of debt and equity, while also supporting our existing portfolio company, Smart Chemical, with $3.7 million of debt to fund an acquisition. On the investment exit front, as Dave already mentioned, we closed on the sale of the operating entity in our investment of SSEG Holdings. We received full repayment of our debt investment in October, and we also anticipate receiving our equity proceeds over the coming months ending the final dissolution of the business and escrow settlements the fair value of our equity investment in sfeg as of september 30th of 167 million includes an estimated amount of escrow proceeds to be received including new investments and add-on activity from q1 and q2 along with a deal activity to start q3 we have invested approximately 206 million through the first eight months of the fiscal year. This exceeds our yearly average of 183 million over the past three years and also puts us on track to have production volumes since inception subject to deal activity continuing for the remaining four months of fiscal year Continues to be ample liquidity in the M&A market creating a competitive environment for new acquisitions at reasonable valuations. As our production volumes show, we have been able to compete effectively for acquisitions that fit our model. This is where we provide both debt and equity to complete the transaction with a meaningful fixed charge coverage and an interest income yield on our total investment in excess of the cost. We continue to be in varying stages of diligence on new possible acquisition opportunities, including accretive add-on acquisitions to existing portfolio companies and we are in review and negotiation with another a number of other new opportunities to our existing portfolio most of the companies have experienced positive results to date though we continue to be cautious due to macroeconomic factors such as elevated energy prices and inflation inflationary pressures we continue to work with all of our portfolio companies to support cost efficiencies and growth initiatives which may include strategic m a as we continue to navigate the current environment in this regard a couple companies to highlight in the portfolio aerotech has experienced growth with existing artists and new touring productions utah pacific has grown with infrastructure investment in the united states and recently global grab and detroit defense have completed strategic add-on investments in order to meet demand in the defense and security sectors. We continue to have no software exposure in the portfolio and to focus our investment activity on companies that offer critical products and or solutions for their customers. And summing up the year to date, our current portfolio is in solid shape. We have a strong and liquid balance sheet, and we continue to execute on our investment strategy with a healthy deal pipeline, providing for the prospect of continued strong earnings and distributions over the next year. while we continue to navigate the challenges of an uncertain economic landscape. I'll turn it over to our Chief Financial Officer, Taylor Ritchie. Thank you, Dave and Erica, and good morning, everyone. Our second fiscal quarter reflected significant investment activity, growth in our interest-bearing investments, along with net unrealized appreciation across the portfolio. For the quarter, we generated net investment income of $4.8 million, or $0.12 per share, and $7.3 million, or $0.18 per share, on an adjusted net investment income basis. This compares to prior quarters' net investment incomes of $15.9 million, or $.40 per share and adjusted net income of $10.4 million, or $26 per share. The quarter-over-quarter decline in adjusted net investment income was primarily a result of lower success fee income and higher borrowing costs associated with the new investment findings. These decreases were partially offset by higher interest income from our growing debt portfolio. Total investment income was $24.2 million compared to $28.4 million in the prior quarter. The decrease was due to $5.3 million in success fee income from the prior order that did not reoccur during the current order, partially offset a $1.4-million increase in interest income. As we've discussed previously, the timing of our collection of success fee and dividend income can vary significantly between importing periods. It's important to evaluate these income streams over longer periods rather than exclusively on a quarterly basis. The weighted average principal balance of our interest-bearing investment portfolio increased to $734 million during the quarter compared to $706 million in the prior quarter. The increase is a result of the recent investment activity, including new portfolio company acquisitions and add-on activity and existing portfolio companies. These recent originations have increased our income-producing asset base and positioned us to generate higher recurring interest income in future periods. The portfolio's weighted average yield increased slightly to 13% compared to 12.9% in the prior quarter. This increase corresponds with the 11 basis point increase in average SOPR during the quarter. In addition to our debt investments in DHE and extrude home both having interest rate floors in excess of the weighted average of the existing portfolio. The interest rate fours, which are included in each of our debt investments, remain an important component of our strategy to maintain stable investment yields through changing interest rate conditions. We believe our debt investment portfolio is well positioned across a range of interest rate environments. As disclosed in our Form 10-Q, based on the current portfolio composition, combined with our floating rate credit facility exposure, a 50 to 150% increase in SOFR would be expected to increase annual net investment income by approximately 1 to 8 cents per share, while an equivalent decline in SOFRA would still result in an increase to annual net income by approximately 1-2 cents per share. This positioning helps mitigate interest rate volatility while maintaining the opportunity for incremental earnings as rates change. Turning to expenses, our net expenses increased to $19.9 million compared to $12.09 million in the prior quarter. The increase is primarily driven by an $8 million increase in capital gains-based incentive accruals. These accrues are recorded in accordance with GAAP and do not represent amounts that are currently contractually payable under our advisory agreement. A significant deal activity during the quarter provided the benefit of a $2.1 million increase in fee credits while also contributing to an increase of $1 million in interest expense from our credit facility. Focusing on portfolio valuations, we recognized $12.2 million of net unrealized depreciation during the first quarter compared to $18.8 million of unrealized appreciation in the prior quarter. The net increase in fair values was primarily driven by increased performance at a number of our portfolio companies, combined with higher market valuation multiples. As a result, net asset value increased to $16.43 per share as of September 8th, compared to $15.24 per share, as of June 30th. The increase was driven by $0.31 per share of net unrealized appreciation and $0,12 per share of the net investment income. These increases were partially offset by our $0.24 per share of distributions paid to common shareholders. Our investment portfolio increased to approximately $1.43 billion at fair value, representing an 11.6% increase from prior quarter. We ended September with investments in 31 portfolio companies, compared with 29 at the end of June 30th. This growth reflects approximately $156.5 million of investment in the quarter, including two new portfolio company acquisitions and additional investments to support the expansion of our team portfolio companies. We continue to monitor our non-accrual investments closely and work with portfolio company management teams to address operating challenges. As of September 30th, loans on non- accrual status represent 3.4% of our investment portfolio at cost and 0.5% at fair value. We anticipate that two of the non-accrual investments will be exited in the coming months while the third continues to see positive results and has begun making incremental payments towards their pass-through interest balance. These payments are reported as interest income upon collection. Turning to our balance sheet, we ended the quarter with approximately $300 million outstanding on our credit facility, with $105 million of unused commitments. Combined with the important features from our facility, we have the flexibility to increase this unused commitment amount to $200 million as we look to support our pipeline and potential new deals. Our asset coverage ratio was 189% of the turnaround, declining from time before as we funded our significant investment activity with proceeds from our credit facilities. Similarly, our debt-to-equity ratio increased to slightly under 1.1 times. We anticipate reduced leverage as we receive equity proceeds from the SFEG exit, but expect this amount to fluctuate as we continue future investment activity. Regarding the equity proceeds for SFEGs, approximately 15% of our equity fair value of $167 million is related to escrows to be settled in the coming quarters. This estimated amount has been discounted from the total escrow associated with the exit, given the uncertainty of collection. We anticipate the remaining 85% of SFEG's fair value to be received by GAIN in the coming months. Finally, on distributions, we entered the fiscal year with $21.3 million, or 53 cents per share, of spillover income. As of quarter end, our spillover was $19.9 million, 50 cents per share. This balance is sufficient to support approximately six months of our current $0.08 per share monthly distribution. Our ability to retain and reinvest bill over income provides an additional source of capital to support portfolio growth and future earnings. We believe this approach complements our focus on generating a strong share of our returns, extending your entire industry-leading return on equity of approximately 25% over the past year and an annualized 18% in the last three years. We continue to evaluate the timing and amount of potential supplemental distributions based on portfolio realization, including the estimated SIPG proceeds to be collected, taxable income considerations, and our broader capital allocation priorities. Overall, we believe that our quarter results align with our focus on maintaining a disciplined capital structure, supporting the performance of our existing investments, and pursuing new investment opportunities that we believe can generate attractive returns for our shareholders. This covers my part of today's call. On that, I'd like to leave Dave to wrap us up. Dave Glatzone, would you like to say a few words at the end here? Yeah, thanks very much, Dave. That was a good presentation, and your fund is doing very well. We're very happy with it, and I think we'll see a lot more dividends. I wish we could settle up on SFG only because people don't, because it's been so spotty and out of sequence, it's really hard for people to see what a fabulous business that was and still is. But it was related to things in the defense area, and we had to go through some really crazy areas because we were selling outside of the United States, and each government has its own way of looking at things. So for me, I haven't been coming in this morning simply because I've got a tide of a cold and I don't want to get my folks involved in this kind of coughing that I've been doing. So anyway, nice move for us in Gladstone Investment and we look forward to many more opportunities. In fact, we have one that I thought would be done with by now but we've got one more i'll say medium size but probably large size if it comes along so so keep listening to us and we'll tell you what we can in the meantime i'm just going to get off and stop talking because i'm losing my voice and i'm sure if there's anything you need you can call into the office and they'll help you out that's the end of this call now well thanks David and moderator will go ahead and take some questions now from the folks on the phone call thank you if you would like to ask a question please press star 1 on your telephone keypad a confirmation tone will indicate your line is in the question queue you may press star 2 if you like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys our first question is from eric flick with lucid capital markets please proceed thank you good morning all i wanted to start with a a bigger kind of picture question either for eric or david or maybe you can both weigh in but just curious with the midterm elections past us now and based on the the results of the elections curious if you could talk about any kind of you know potential impacts either positive or negative that you anticipate on uh either the economic activity and the lending environment? Yeah. Eric, I can take a crack at that, and Eric, you certainly weigh in here. I don't think we right now see any significant impact. Obviously, we don't know what will happen to interest rates to some degree, but that's not necessarily just a function of the election. But I think, as Taylor correctly said in his presentation, we believe the way we're structured with the floors that we have on our debt securities and what have you, that we feel pretty good about whichever way, say, SOFR moves, as an example, and we'll continue with that structure. As you know, that's the way in which we try to price our deals, how we look at it. So from that perspective, I think we feel good. I think are there certain sectors that could see some impact? You know, clearly things around defense. However, in our case with the portfolio companies we have, most of these are on platforms or on programs that we know have been funded. And so we'll be cautious as we look at new deals perhaps that are in that sector. But other than that, I think we feel pretty good where we are. Erica, do you have anything you want to add to that? No, I think the only thing I would add is our underwriting process attempts to, you know, avoid those sectors that are, you know, obviously susceptible to major swings in policies. Of course, if something comes that's unexpected, we need to be responsive. But overall, our portfolio companies have shown a tremendous amount of resiliency, especially over various economic policies over the last several years. So, no, I don't expect anything immediate coming out of the midterm elections, as Dave described. Thank you for your thoughts there. And next one, maybe for Taylor, thank you for giving the range of potential increase to NII for increases in SOFR rates. Just curious, do you also have the average debt service coverage ratio for your portfolio? I'm just curious, you know, if rates do go higher, are there any companies that you have any concerns about being able to handle a higher interest burden today? Sure. Thanks, Eric. So, from a debt service coverage ratio, that does fluctuate pretty meaningfully from company to company, but I think I would point to the fact that most of our portfolio companies have been in the portfolio for a while now, including years where SOFR was higher than where it is now, or so far and previously, a lot more, from where it is today. So I believe our companies are still positioned to manage that debt service coverage going forward despite rates rising, especially considering many of our investments are at their interest rate floor. So while they may see some level of increase, it will take a little bit more time for SOFR to rise to where they'll start being impacted in necessarily. Thanks. And last one for me, and then I'll step aside. Eric, I think you mentioned, I think used the term healthy when referring to the pipeline today. And that's great to hear, given the strength that you had in the most recent quarter. I wonder if you could just give a little bit more color in terms of kind of what you're seeing has, maybe with the midterm elections passed now, some companies that were sitting on the sidelines feel more comfortable kind of going through with plans, but just curious, do you expect, you know, origination activity, you know, both new and add-on to continue being, you know, kind of positive over the next quarter or so? Yeah, I don't see any changes to the pipeline, again, as a result of the midterm election. We have been hearing from a number of industry participants, you you know, advisors in the M&A space, that pitch activity continues to be strong and companies that have been sitting on the sidelines perhaps are considering going to market because they can only wait so long, so to speak. So, you know from that standpoint, that's all anecdotal, but I think our pipeline itself has remained pretty stable over the last several months. And while the size of the pipeline may not be at record levels, Our actionable opportunities, especially with our ability to provide all of the capital for a transaction, remains pretty appealing in the marketplace and has allowed us to have the record that we have in terms of new production activity. So a long way of saying I don't think – I don' see a change in that in the near term here. Thanks for taking my questions today. Thanks, Eric. Our next question is from Christopher Nolan with Ladenburg-Thalman. Please proceed. Hi. David Gladstone. Glad to hear that you're doing okay, and I hope you're feeling better. Always good to hear from you. Given the jump in originations in the quarter, were there any timing issues where investments came on later so we could see a bump to revenues in the next quarter? Sure. Chris it's Taylor I'll take that one so in particular extrude home that one closed on 930 so while we did draw for that funding and that interest expense associated with the borrowings was reflected in 930 you really didn't see the corresponding interest income from that investment picked up in Q2 but That will contribute to Q3 and going forward, the revenues. Great. Then on SFEG, should we see some sort of net gain on, you know, realization from the escrow or, you knows, the rest of the equity, the non-escrow equity? Sure. So the way I would look at SFEGs and where it's fair value currently, As I mentioned, about 85 percent of that fair value is associated with the cost basis and essentially built-in gain, which we expect to collect. The remaining 15 percent of it, so about $25 million or so, is really the escrow amount that we've already materially discounted from where it may be ultimately. So yes, to answer that question, there is the potential for additional collections, but that would not occur probably for the next couple of years or so as escrows are finally settled. There's a time period after an exit where escrows, today outstanding, it's kind of the dust settles. So I would expect some fluctuation from where it's marked as of 930, but we do feel pretty confident in our ability to collect what we have fair valued and obviously reserving some potential for future gains but that's to be determined so while I'm hopeful and I would love to tell you that we're going to collect every dollar in escrows that is still outstanding Great, final question for me is the investment Detroit Defense and they have a cool business they're at your investor day a few months ago by the way thank you for hosting that But do you guys – are these acquisitions tend to be immediately accretive to equity so you can possibly see a bump up in your equity holding values in Detroit, or is it one of these things which is sort of a longer-term accretion? Yeah, Chris, the short answer is yes. These acquisitions are accreted, and that company, I think as you saw, having come to the conference, and thanks for coming, you know they had a more of a slowdown as a result of some programs and some release of funds etc which have now occurred so we we have really really high expectations uh for detroit um defense the quality of management and these new acquisitions are just adding to the overall capability so yeah we we definitely feel that that's going to keep us um you know be accretive and certainly to the equity value as we move forward here. Thank you, Dave. Okay, that's it for me. Thank you. Thanks, Chris. As a reminder, there's star one on your telephone keypad if you would like to ask a question. Our next question is from Mark Fararon, private investor. Please proceed. Hi, this is Mark Faron. Just wanted to say congratulations on the killer SFEG transaction. action. And I've got basically two questions on that. Will the board try to pay the gain as a supplemental distribution? And what range would we probably see on that? You know, you can do the back of the envelope calculations. Maybe it's like $190 to $225 a share at some point. And then the other question has to do with me being a long-term shareholder and having most of my shares in qualified plans, do you think the board would commit to not retaining the proceeds as a deemed distribution due to the difficulties with the IRS refunding that taxes paid? Once again, thanks for killing it in the quarter and in the year, and appreciate the help. Sure. Mark, thanks for calling in. This is Taylor, and I'll address those questions. First off, we want to make sure that we actually have the final numbers and collect the proceeds from the SFPG exit before we go to the board to recommend the actual supplemental distribution. But yes, with our structure and having to distribute our realized gains to our shareholders, I would expect some supplemental to be paid going forward. That being said, the range is still to be determined as we look at our ability to reinvest our retained capital, especially as I mentioned with our spillover, where it is, and the ability for us to deploy that balance into new investments that are generating meaningful returns. look at our return on equity and consistently lead the pack from a from what metric so while yes we will distribute these gains it's still to be determined what the amount is and our outstanding tax requirements where they are regarding the Dean distribution well every option is on the table I do think that the deemed distribution may not necessarily be the most advantageous path forward so we will continue to look at other opportunities for for distributing this supplemental thanks i appreciate that and uh congratulations once again great team our next question is a follow-up from christopher nolan with ladderbrook valvin please proceed Taylor, is there any sort of expiration date for any of that spillover income where you need to distribute it before it expires? Sure. So when we enter a new fiscal year with spillover incoming, that's required to be distributed to shareholders in the current fiscal year. So, for example, we entered this one with a little over 20 million of spillover incomes. going into the current fiscal year, that spillover does need to be distributed to shareholders before the end of 30-31-27, so we will look to work through what we entered the fiscal year as part of our distributions. Thank you. There are no further questions at this time. I would like to pass it back over to Dave Dolan to close this out. Thank you very much and we truly appreciate our shareholders and we appreciate you all listening in, asking the questions that you asked are very important to us and we'll continue trying to the success that we've had to date and continue to this performance. So thanks and that's the end of this call. Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.